The UK has fallen from sovereign investors’ favourite market to fourth favourite, according to a special tenth anniversary edition of the Invesco Global Sovereign Asset Management Study. In 2014, the UK ranked as the most desirable destination for sovereign investors’ capital, but has since fallen behind the US, India, and Germany respectively.
Invesco’s study, which is based on data collected over the past ten years, charts sovereigns’ rise to highly influential public institutions who are assuming a leadership role commensurate with their scale and importance as global investors.
Sovereigns’ successes fuel new launches
Since Invesco’s first study, sovereign investors have grown in scale to become some of the most influential institutional investors in the world, managing $33 trillion* in assets. In doing so, they have matured into high-profile public institutions expected to be transparent, accountable, and driving positive economic and social change.
The success of sovereign funds has prompted many countries to create their own. The last decade has seen a steady increase in the number of development sovereigns, which are funds committed to diversifying and developing the local economy. Governments across several emerging markets, particularly in Africa, increasingly recognise the role they can play in driving long-term development. In the past decade, 12 new sovereign wealth funds have been established in Africa, of which 11 have a strategic role in developing their local economies.
Development sovereigns have grown in sophistication as well as in number. Once seen as custodians of state assets, they are now more conventional global investors with aggressive return targets. Direct Strategic Investments, which in 2013/14 made up 79% of development sovereigns’ portfolios, have fallen to 46% in 2022, in favour of higher equity, fixed income and alternatives allocations (Fig. 1).
Figure 1. Development sovereigns’ asset allocation, average %
US supplants UK as top market
In 2014, sovereigns considered the UK as the most desirable destination for investment, followed by Germany and the US respectively. However, the US has since supplanted the UK as the most desirable, due to its steady economic growth, strong currency and regulatory stability (Fig. 2).
Fig. 2. Attractiveness of economies for portfolio, average score 0-10, sovereign wealth funds only
While the US has been a major destination for investment over the past decade, recent interviews have revealed an increased desire for more balanced global exposure. Some sovereign investors believe they have become overly reliant on returns from the US market, which has left them vulnerable to the 2022 correction in equity markets.
A rebalance towards emerging markets
Emerging markets look set to be the beneficiaries of this rebalance. India has overtaken China as the most popular emerging market, having climbed from ninth most favoured market overall in 2014 to second in 2022. While this is partly because funds with dedicated Asian allocations are trimming their China exposure, investors have commended India’s positive economic reforms and strong demographic profile.
“Demographic patterns have been a key theme in our recent discussions with sovereigns. As very long-term investors, they are generally more comfortable with the political and currency risks often found in countries with rapidly growing populations, which can deter other types of institutional investors. These markets are seen as offering long-term opportunities in real estate and infrastructure, in particular”.Rod Ringrow, Head of Official Institutions at Invesco
The peak of private markets?
In pursuit of diversification amid low yields, sovereigns’ allocations to private equity, real estate and infrastructure increased from 8% in 2013 to 22% in 2022. Sovereigns now manage $719 billion in private assets, up from $205 billion in 2011**.
However, sovereigns have had to compete with other large institutional investors for these assets, and in recent interviews, many have questioned whether this pace can be maintained over the next decade. One APAC-based respondent remarked that the “ever greater demand for private markets… tilts against asset owners in terms of pricing and is likely to create challenges over the long term.”
Rising yields may offer a release valve. From 2013/14 to 2021/22, liability sovereigns’ fixed income allocations had fallen from 38% to 29%, but this trend could be set to reverse in the coming years, with many noting that fixed income is once again showing defensive, long-term diversification potential.
“Over the past ten years, sovereigns have invested with the wind at their backs. The sovereigns we spoke to for this report see a much more challenging environment ahead, in which tighter monetary policy challenges the macroeconomic assumptions they have been working under for the past decade. That said, sovereigns have almost unparalleled horizons and falling valuations create attractive entry points for capitalising on long-term opportunities. Throughout the past decade, sovereigns have adapted and evolved, developing strategies to weather fluctuating markets and capitalise on opportunities. With 2022 looking like an inflection point, they will need to continue to do so over the next ten years”.Rod Ringrow, Head of Official Institutions at Invesco